Games and economy: the prisoner’s dilemma.
Posted June 23, 2009on:
Games theory is a disciple that studies the problem of the interdependence between the players of the same game.
The behaviour analysis of game players is called strategic interaction and is used in Business studies to understand complex aspects of some kinds of markets and to build descriptive models based on subjects’ behaviours in uncertain situations.
For example, the famous “prisoner’s dilemma” is one of the main problems in game theory and is used to explain the reasons of a certain player’s choice rather than another one.
Originally developed by Merrill Flood e Melvin Dresher, the prisoner’s dilemma is based on the following riddle:
Two men are arrested by the cops, but they don’t have sufficient evidence to incriminate them:
for this reason, the cops decide to lock the two prisoners in different rooms and visit them separately to make a deal.
- If one of them testifies (defects) against the other he will obtain the liberty and his crime partner will be sentenced to 10 year in jail.
- If both remain silent, the will convicted to six months jail sentence.
- If each betrays the other both of them will receive a five year jail sentence.
So prisoners have to choose if betray the other or remain silent with the reassurance that nobody will ever know that he betrayed his partner before the end of the trial.
Now the fundamental question is: how should the prisoners act?
The game theory explains this dilemma with the help of Pareto optimality, a concept developed by the Italian economist Vilfredo Pareto who studied the economic efficiency.
The best choice for both the prisoners is to play in accord with the dominant strategy and confess their crime. This is the only way to contain the damages and the risks of be betrayed first by the other, minimizing the risk of a 10years jail sentences.
This interesting slide is a good introduction to the game theory study.